In the immediate aftermath of the data release from the Office for National Statistics, the FTSE 100 Index had lost more than 250 points before rallying on hopes that Ben Bernanke, the chairman of the US Federal Reserve would do something – anything in fact – to calm markets before the opening of business on Wall Street.

The bare bones of today's news are as follows. City traders had expected manufacturing output to be up and the trade gap to narrow. In the event, there was further evidence that industry's relatively strong recovery in 2010 has run out of steam. Manufacturing production in the three months to June was 0.5% lower than in the previous three months, mainly because domestic demand is so weak. Consumers have been tightening their belts and this has been reflected in weaker order books for factories.

Meanwhile, the gap between imports and exports widened from £8.5bn in May to £8.9bn in June. Over the quarter, the trade deficit in goods widened by £2.4bn to £24.6bn, while the surplus on services was pared back slightly. All this, of course, before UK firms count the cost of the latest financial market crash and at a time when the low level of the pound should be making UK goods hyper-competitive abroad.

The Office for National Statistics said that the industrial production figures were not bad enough in themselves to warrant a cut in the growth estimate of 0.2% for the second quarter, but it is clear that activity is not going to expand by the 1.7% in 2011 that George Osborne predicted in his March budget. Sir Mervyn King will give the Bank of England's view of the prospects for the UK economy on Wednesday, and the City is braced for some unpleasant news.

For the past few weeks, the chancellor has been bragging on about how his tough action to cut Britain's deficit has won the support of the financial markets, preventing the sovereign debt crisis in Europe and America from heading to these shores. But deficit reduction requires two things: fiscal discipline and growth. The markets have started to wake up to the idea that the UK has plenty of the former but precious little of the latter. And they have concluded, rightly, that the deficit is going to come down more slowly as a result.